Saudi Arabia Prepared to Protect Their Share Of Global Oil Market

Back in April, OPEC held a meeting with non-OPEC members that advocated freezing production to keep prices low. It did not go very well. Another meeting is scheduled for early June in Vienna, which will be the first gathering since Khalid al-Falih took over the duties as Saudi Oil Minister after Ali al-Maimi resigned. Nobody is sure what Riyadh’s intentions for the near future are or how they will affect the somewhat strained relationships Saudi Arabia currently has with other oil producers. Certainly, such a meeting will prompt an oil and gas reserves evaluation by any nations dependent on OPEC oil.

Rather than worrying about the low price of oil, Riyadh is intent on moving ahead with a plan designed to safeguard its portion of the global oil market. Saudi Arabia seems committed to check market fluctuations for the next five years. That will require a restructuring of its economy with an eye toward cutting spending and discontinuing the reliance it has on energy revenues. This can only be accomplished after studying its oil and gas industry cost engineering policies. Whether the House of Saud can convince its youngest citizens to withstand such a critical economic shift is uncertain, but petroleum economics courses tend to support the logic behind the new strategy.

In 2014, the price of oil dropped from $115 per barrel to $80. Most of the world’s oil producing countries expected OPEC to reduce their output, which would bring the prices back to the previous level by balancing the market. Saudi Arabia decided to increase their output instead. By early 2015, the price of oil had plummeted to a mere $45 per barrel due to a Saudi increase of 660,000 barrels daily. Their intent was to make it less attractive for other countries to jump into the market. Advanced technologies had opened new fields, and the expenses were easily offset by oil’s high market value. U.S. output soared from 5.5 million barrels per day in January of 2011 to 9.3 million barrels per day four years later. This increase was especially surprising since global demand for oil increased by only 1 million barrels per day.

Shale oil projects have a very different timeline than standard approaches do. It can take several years before a traditional well is profitable. Offshore drillings average eight years from discovery to production. Shale resources can be producing in a few months, but they tap out quickly. That makes shale projects very susceptible to short-term market fluctuations. The Saudis were hoping to chase shale producers from the market by driving down the prices. However, as long as prices remained above $100 per barrel, it was projected that U.S. shale crude production could increase by 40 percent by 2020. Advances in technology have enabled shale production to remain viable even when oil went as low as $60 per barrel.

With its oil revenues declining by nearly 50 percent, Saudi Arabia has been forced to tighten its spending and keep it tight for several more years. That is not easy when a nation has become accustomed to lavish spending.

Riyadh is playing hardball. Saudi intends to maintain its share of the market while keeping the price of oil lower in the hopes that the competition will be unable to survive. The strategy is for oil to remain below $50 per barrel. Although there is currently an oversupply of oil, that could change to an undersupply by the end of 2017. However, if the price gets too low, it would be counterproductive for the Saudi coffers. As long as Saudi output stays around 10.5 million barrels per day, it can continue to keep its market share and force other oil producers to put planned projects on hold or abandon them completely.